Elon Musk Just Announced Tesla Is Extending Its Warranties  And That Earnings Would Get Hit As A Result (TSLA)

Friday

Aug 15, 2014 at 8:56 PM

Rob Wile

Elon Musk just announced Tesla will extend warranties on Model S cars to cover the life of the vehicle's battery pack.

He also warned this will hurt earnings in the short term.

In a note on Tesla's blog posted Friday afternoon, Musk says the Model S will now have an 8-year, "infinite-mile" warranty that will also apply retroactively.

"In hindsight, this should have been our policy from the beginning of the Model S program," he writes. "If we truly believe that electric motors are fundamentally more reliable than gasoline engines, with far fewer moving parts and no oily residue or combustion byproducts to gum up the works, then our warranty policy should reflect that."

But this will likely mean Tesla will require more reserves to address issues covered by the warranty, meaning lower profit margins.

"To investors in Tesla, I must acknowledge that this will have a moderately negative effect on Tesla earnings in the short term, as our warranty reserves will necessarily have to increase above current levels," he writes. "However, by doing the right thing for Tesla vehicle owners at this early stage of our company, I am confident that it will work out well in the long term," he adds.

Tesla shares closed the week up 1.7% to an all-time high of $262.01.

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